Many residential tenants pay a deposit to their landlord or letting agent at the start of their tenancy. This is held in case of breach of the tenant's covenants. Poor management of these deposits has led to the introduction by the Government of a Tenancy Deposit Scheme which came into force on 6 April 2007.

The Scheme offers protection to tenants to avoid situations where landlords wrongfully withhold the deposit monies. The Scheme will apply to any money taken as security whether or not it is titled as a 'deposit' and offers a framework for dealing with disputes.

There are two types of schemes: the Custodial Scheme and Insurance Scheme. Landlords can choose which suits best and must deposit the monies within 14 days of receipt from the tenant.

The Custodial Scheme

The landlord is obliged to place the monies in a deposit account on receipt of the deposit from the tenant. The account is administered by a Government appointee. The Landlord must give the tenant details as to how their deposit is protected. At the end of the tenancy, the deposit will be released to either the landlord or the tenant within 10 days of the receipt of a notice signed by both parties which agrees the terms of the distribution. Where there is a dispute, the disputed sum will be retained until such time the Independent Housing Ombudsman (IHO) or courts decide how the sum should be distributed.

The Insurance Scheme

On receipt of the deposit from the tenant, the landlord retains the monies in his own account. Again the Landlord must give the Tenant details as to how their deposit is protected. If there is a dispute at the end of the tenancy, the Scheme requires the landlord to deposit the disputed sum in the Scheme account within 10 days of the dispute arising. It is retained here until such time as the dispute is resolved by the IHO.

If the landlord fails to place the disputed sum into the Scheme, the Scheme must still pay out the specified sum provided the tenant is entitled to it.

The landlord is required to pay an insurance premium to cover the Scheme's potential liability to the tenant. The Scheme will be responsible for arranging the insurance and requiring the landlord's contribution.

The Government has set a rate of interest to be returned with the deposit. Any interest earned on the Scheme's account in excess of this amount will be retained by the Scheme to cover administration costs.

For further information contact David Hogg at david.hogg@close-thornton.co.uk or call him on 01325 466461

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